Lightbank Start Offers Tech Talent $100,000 To Co-Found A Company

Lightbank, the venture fund created by Groupon Chairman Eric Lefkofsky and Director Brad Keywell, has launched a new program intended to keep emerging technology talent in Chicago to start new businesses rather than settle for salaried positions.

Lightbank

Eric Lefkofsky and Brad Keywell of Lightbank.

Dubbed Lightbank Start, the program seeks teams of one to four founders, especially recent computer science students, to apply with a germ of a business idea or product.

Accepted teams or individuals will be asked to trade 50% of equity in their future start-ups for $100,000 in seed financing and hands-on help to “ideate, create, iterate and start” a real, sustainable company with Lightbank’s partners and staff, says Lightbank Partner Paul H. Lee.

The program will provide the teams with office space in Lightbank’s Chicago headquarters, along with some business services–like search engine optimization, marketing and advertising–along with strategic help from Lightbank.

Accepted founders will be required to work out of Lightbank’s offices until a mutually agreed-upon date. There’s no minimum time, or maximum stay. Lightbank will negotiate such details with each team.

The fund’s founders and Lee note that this program will eliminate a need for would-be entrepreneurs to attain friends-and-family funding, or take a distracting day job to survive while they get started.

Lightbank Start shouldn’t be compared, Lee suggests, to accelerator and incubator programs along the lines of Y Combinator, TechStars or 500 Startups, which generally seek companies and founders with more experience, and better developed products or start-ups to pitch.

Currently, Y Combinator invests $11,000 per start-up plus $3,000 per founder in exchange for 2%-10% equity in admitted companies. Graduates from the three-month program automatically get convertible debt financing offers of $150,000 per start-up from the StartFund, Y Combinator’s affiliate angel investor group since 2011.

In March, Y Combinator began to consider applicants with “no idea” for a particular business as long as they had technical skills and a good professional track record.

Other leading accelerator and incubator programs offer similar terms. For example, TechStars invests $18,000 per start-up and asks for 6% equity, while its graduating entrepreneurs get an automatic $100,000 convertible debt financing option via affiliated investors. 500 Startups invests up to $100,000 in funding for about 5% equity in its companies.

For Lightbank Start, should a team fail to launch a sustainable business in a reasonable time, but still demonstrate responsibility and technical talent, the program will help its members find relevant jobs at start-ups in their portfolio, or at the fund full-time.

An earlier program from Lightbank called Founders in Residence, which VentureWire wrote about in May, encourages professionals with deep industry experience to break from employee ranks to start their own companies. They attain up to $2 million in equity financing from Lightbank, but are expected to pitch more sophisticated businesses.

Lightbank’s portfolio includes 53 companies already, across a widening range of industries, encompassing mobile game makers SkyVu Entertainment, digital education publishers Bench Prep, social travel discovery app GTrot, and a number of business-to-business players that help companies with their customer loyalty programs, social media marketing, geolocation and data analytics.

VentureWire interviewed Lightbank’s co-founders about their new initiative, and what’s changing as Lightbank branches into new industries, including most recently mobile gaming via SkyVu Entertainment.

Following is an edited version of that conversation.

Q: Why did you create Lightbank Start?

BRAD KEYWELL: There are groups of young people who have ideas and great technical skills but they are not necessarily sure of where they are going in business and in life. We’re giving them $100,000 to move into our space here in Chicago, and tinker around, pivot, iterate their ideas and start something meaningful.

Q: Where are you recruiting – and are you encouraging tech undergrads to drop out of college, like the Thiel Fellows to work at Lightbank Start?

BRAD KEYWELL: We’re not specifically looking for dropouts or graduates or people of any age, though we imagine most will be younger.

So far, we’ve been actively recruiting at campuses in the Midwest. We’re also informally getting the word out at campuses across the country, working with great technology professors, computer science departments, and people we think are influential.

Q: How does this program fit into Lightbank’s overall strategy?

ERIC LEFKOFSKY: We think of this fund as a means of working on projects we want to work on, with people we want to work with… Unlike most venture capital funds, this is mostly our money. So, we take a much more hands-on role in helping our companies get built. Ultimately, we’re not writing checks and sending people to board meetings.

Our core competency is building great, Internet businesses, not investing…

With Lightbank Start we’re simply giving a chance to inexperienced, but skilled people to partner with us. Lightbank Start is just one part of the Lightbank platform.

Q: What do you mean when you say “platform”?

ERIC LEFKOFSKY: We’re like the Berkshire Hathaway of the tech business. We not only invest in and help, but also create new companies from within the fund. We also embed our people into the daily operations of companies where we invested a significant piece. This is not normal for the industry.

Imagine if Kleiner Perkins sent half of its staff, as we have in the last 18 months, to work full-time in its portfolio companies, rolling up their sleeves and getting things done?

Q: What are some examples of this involvement?

BRAD KEYWELL: Our investments in maybe 30-40 of the companies we’ve backed in over the past two years have been definitely non-minority. That is more than 50 companies, now. And all of partners all have real operational backgrounds. Vickie Levine at Motorola, Paul Lee at Playboy…so we have a lot of examples, actually, and it’s hard to pick just one.

ERIC LEFKOFSKY: Well, we co-founded LightSwitch. They help small businesses win customers through the power of videos, which they make and distribute. We had someone working with LightSwitch on our team, and said why don’t you go help build this? We own the majority [stake] and are very involved.

There’s also GTrot. We initially funded them, made a minority investment. They wanted to do this social travel discovery thing, but it wasn’t working. So their young, sharp founder (Zachary Smith) moved to Chicago.

We helped him iterate and focus on what was interesting there, about social and local. The business is now Rang.com (a.k.a. Boomerang) which is a very creative, local gifting platform. It lets Facebook users give friends digital vouchers for gifts from local businesses.

Q: And that’s really different from what traditional funds do…?

ERIC LEFKOFSKY: Seems like 99.9% of funds would have had a minority investment, and too many other investments to manage. They just would have let it fail, and taken the hit.

Q: As Lightbank grows, what’s changing?

BRAD KEYWELL: As our pace of investing picks up, we realize we have to hire aggressively to be able to do what we do for our portfolio. Building businesses where you invest in businesses is rare, as Eric said. Thankfully, everything ebbs and flows. All 50-something companies we’re backing don’t need all our help all the time.

There was a time not long ago, in some way, we were running two to three companies, daily, and the fund. I was the interim CEO of [a large ad-tech business] Mediaocean. Eric was spending a ton of time at Groupon. If anything we both have more time than we had a year or two ago.

Q: What kind of companies or what industries will you invest in over the next year?

ERIC LEFKOFSKY: We intend to stay relatively correlated to the big things we’ve come to be good at over time. Mobile. Social. Local. By virtue of our experience at Groupon–building an Internet company in 48 countries? We understand that.

That means a lot of e-commerce, mobile and local.

Recently, though, if we come across a great gaming company, we’d love to invest in–we might. And we did!

BRAD KEYWELL: I am dying to tell you about the next game that Sky Vu Entertainment has coming out. But I can’t. It’s absolutely hilarious–and addictive.

Q: Any words of advice for Groupon, now that you both have some more distance from daily operations there?

BRAD KEYWELL: [Silent.]

ERICK LEFKOFKSY: I’ll leave what Groupon should do to the side, here. That’s really up to [Groupon CEO] Andrew [Mason].

Comments (4 of 4)

Even so, follow on rounds of financing will dilute the founder(s) down to minority stakes.

Lightbank is doing 50% equity stake targets because this is risky investing and they want a big piece of the few "hits" they get. Let's be clear: almost all of these seed investments Lightbank makes will *fail*, most start-ups do. Lightbank is trying to make some money on the few (if any) that succeed.

So, I understand why Lightbank would do this, an entrepreneur needs to understand why they would: why put your blood, sweat and tears into something that you'll get diluted out of over time? Why not work somewhere else or part time, bootstrap your start-up and build out a prototype, flesh out a business model and maybe even test with some potential customers to build some value?

I suppose it depends on your personality, as to which scenario fits:

Scenario 1:

If you, as an entrepreneur, do some or all of the above, the valuation would be much higher than $200K and you would be in a position to maintain control of the company (you show you know more than the VCs do about the market you are attacking). You take the risk, you get more equity as a reward.

Scenario 2:

Those who do take Lightbank's deal should look at it as a "job": they are paying you to work on something and if it is successful they are giving you some equity for your time. Lightbank takes the risk, you take the equity.

The question is, which scenario fits your personality?

9:46 am September 18, 2012

K8 wrote:

Would have given the founders at least 51% to keep them motivated.

11:24 am September 13, 2012

Bill wrote:

That's an unbelievable amount of equity to give away for 100k. Greedy, greedy VC's at it again...

9:47 pm September 12, 2012

Eric wrote:

Wow, that seems like a HUGE equity to give away for the amount of money you don't really need at the beginning. Therefore, if you had 3 original founders in your company, that would mean you would only have 16.7% each while the 'bank' gets 50% of a company you started. Since, you do not have the majority share, could you be voted easily to leave a company you started? I am not a rocket scientist but something does not compute. I recommend to bootstrap in the beginning instead. Get in the tech community, seek mentors and like-minded individuals. Where you lack in funds, you must over compensate in creativity. Your motto should be, "if there is a will, there is a way". You might find that due to the imbalance of the profit distribution/ownership, it might feel very similar to working for somebody else as an employee, which would be counter productive, I would assume. Startups should always own the majority stake in the own companies. Entrepreneurs should have the chance to reap the rewards of success that they worked hard developing. Otherwise, even success would equate to an empty victory. There is a reason, established organizations in the tech community who really want to help startups only ask a fraction of a company's equity.

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